Chairman's Statement

Extracted from Annual Report 2022

Dear Fellow Shareholders,

2022 in Review and Looking Forward to 2023

Throughout almost all of 2022, commencing with the outbreak of hostilities in Ukraine, the diamond industry faced significant global political and macroeconomic headwinds. The Ukrainian conflict in Europe affected energy and grain prices, driving inflation to exceptionally high levels in the western economies in general, and particularly in the key U.S. market. As a result, the US Federal Reserve raised interest rates aggressively to levels not seen in over a decade, negatively impacting the equities, housing and other markets and ultimately eroding consumer confidence. Indeed, in the holiday season in the fourth quarter of 2022, retail sales in the U.S. did not meet expectations. In addition, in the second most important market for diamond jewellery, China, ongoing Zero-Covid policy pandemic-related restrictions disrupted retail activity throughout the year.

The diamond industry value chain was further impaired by the U.S. sanctions enacted in early April against Alrosa, the major Russian producer, typically accounting for over 35% of the global rough diamond production. The expected shortage of rough diamonds drove their prices up throughout most of 2022, though seemingly, in retrospect, Alrosa production did, in fact, for the most part, enter the value chain. Concurrent with the increase in rough diamond prices, polished diamond prices actually eroded for most of the year, commencing in the second quarter through to year's end, as the combined headwinds of inflation and interest rates took their toll on the average consumer's appetite, though the demand for high-end luxury brands, mostly bought by the most affluent consumers, showed higher resiliency to the prevailing headwinds. These two divergent trends, increasing rough prices and decreasing polished prices amidst consumer uncertainty, manifested themselves as impaired margins and increased inventories for our midstream customers. Thus, towards year-end, polishing activity slowed and trended towards smaller less expensive rough material.

Notwithstanding these significant headwinds, 2022 saw a modest 6% increase in Galaxy® family scans to 35 million stones, again setting a new record. The Group delivered 93 Galaxy® systems in 2022, and, as of 31 December 2022, our installed base was 803 systems. We expect Galaxy® usage to hit a new record again in 2023, as both the installed base continues to expand and, more significantly, we broaden our addressable market by introducing business models tailored to as yet minimally-tapped segments of stone types, sizes and qualities. We will be launching the Meteor™ Plus in the second quarter to bring a substantial reduction in the total cost of ownership (TCO) to the segment of 40-90 point rough stones, similar to the benefits embodied in our Meteorite™ Plus for stones in the sub-40 points segment. We will also introduce new business models for Lab Grown Diamonds (LGD) as well as for additional strata of natural diamonds of lower qualities. The launch of our much enhanced Advisor® 8.0 planning software in 2022 also contributed to the expansion of our customer base in the midstream polishing segment of the diamond industry value chain. Continuous upgrades to our Advisor® software will be implemented on an ongoing basis throughout 2023, to incrementally improve the value proposition of our Galaxy®-Advisor® duo.

Sarine Diamond Journey™ and grading were approximately 11% of Group revenue for FY2022, up from 8% in 2021.

Overall recurring revenues, comprised of Galaxy® family scans, rough diamond digital tenders, Quazer® laser cutting and shaping services, rough and polished diamond trade-related services, and annual maintenance contracts, were approximately 50% of the Group's revenues in 2022, up from 46% in 2021. This is noteworthy as our revenues from our rough diamond digital tender services were impaired in 2022 by the U.S. sanctions on our Russian customers, Alrosa and Grib, with whom we did no business from April onwards. Overall rough and polished diamond wholesale and retail related (“Trade”) revenues, from digital tenders, the Sarine Profile™, the Sarine Diamond Journey™ and grading, were approximately 11% of Group revenue for FY2022, up from 8% in 2021. We expect Trade revenues to continue growing in FY2023 from new customers, the broadening adoption of our technologies and the in-process acquisition of a majority stake in the New York based Gem Certification and Assurance Lab, GCAL.

Environmental and sustainability issues continue to gain prominence, and even more so in 2022 due to the conflict in Europe and its impact on consumer awareness of ethical issues related to diamond sourcing. We made significant progress in 2022 with the adoption by key luxury global brands of our Sarine Diamond Journey™ as their sustainability solution of choice. Maison Boucheron and the Aura blockchain consortium, a not-for-profit organisation aimed at providing tools to enhance transparency and trust in the luxury industry, comprised of LVMH, Cartier, Prada and OTB, have already implemented or are in various stages of running pilot programmes utilising our diverse technologies, including our AI-derived grading. Additional high-end luxury brands in the key U.S., European and Chinese markets are also evaluating and testing our Sarine Diamond Journey™ provenance paradigm, and we expect expanded adoption of it in 2023. This espousal by leading global brands facilitates our marketing to additional industry leaders, thus further contributing to its accelerated embracing.

A faster version of the Sarine AutoScan™, which will also handle smaller rough stones economically, is already in alpha-testing

As the conflict in Ukraine enters its second year, the U.S. is reportedly looking to tighten its sanctions on Russian diamonds. It seems that the proviso that allowed the importation into the U.S. of Russian-mined diamonds cut and polished elsewhere (e.g., India) will be eliminated. Apparently, the U.S. and the E.U. are aiming to develop a “‘watertight’ traceability system” for diamonds as a way to preclude any importation of Russian sourced gems. “The Belgium government has suggested an international traceability requirement,” reported Tom Neys, spokesperson for Antwerp World Diamond Centre, a key Belgian industry group. Their proposal would mean that every company who wants access to the U.S., E.U., and other G-7 markets would need to provide definitive ("watertight") provenance information. We believe the Sarine AutoScan™, our robotic system for the high-speed scanning of rough stones, which provides the capability to economically document the extraction of rough diamonds at their mined source, and the rough stones' subsequent traceability by our Sarine Diamond Journey™, can provide the entire value chain with the means with which to fully and transparently comply with these new government requirements with minimal disruption. A faster version of the Sarine AutoScan™, which will also handle smaller rough stones economically, is already in alpha-testing and will make our solution's ability to meet these new government statutes even more robust.

We continued in 2022 with the broader introduction of our revolutionary e-Grading™ initiative to midstream and downstream customers. Concurrently, the in-lab implementation of our AI-based grading paradigm continued to gain traction with leading U.S. and European industry players. The recognition of the value of our consistent and objective grading, along with its seamless integration with our Sarine Diamond Journey™ led Maison Boucheron to adopt our grading along with our traceability initially for their Etoile Paris line of bridal jewellery, and in 2023 it will be expanded to all their centre solitaire stones. Our AI grading is also being evaluated by additional luxury brands, in parallel with their execution of pilot programmes implementing our Sarine Diamond Journey™ traceability paradigm. We intend to broaden the midstream polishing segment's exposure to e-Grading™ dramatically in 2023, leveraging its clear benefits to offer polishers a viable cost-effective solution for the grading of their currently non-graded smaller and lower quality goods, an extensive market, as well as for LGD. E-Grading™ is also the core technology enabling the planned expansion of GCAL. To guarantee its impeccable record of consistent quality work, GCAL has always operated out of a single location in New York. However, by implementing Sarine's unique e-Grading™, GCAL will be able to expand its services globally to diamond centres in India, Botswana and Dubai. It will also allow GCAL to significantly grow its services to U.S. retailers and wholesalers, without compromising its renowned stringent levels of quality and consistency and without incurring the additional costs of training and retaining numerous highly qualified gemmologists and accommodating them with expensive work space in the centre of New York City.

Estimates forecast the market value of LGD may be as high as US$ 40-50 billion by 2030

The market for lab-grown diamonds (LGD) continued to expand in 2022. LGD made up an estimated 10 per cent of total diamond jewellery sales worldwide, and their share of the market is expected to grow with a CAGR of over 9%, outpacing that of the overall diamond jewellery market (estimated by Bain to be under 7%). The U.S. market remains the primary market for LGD, comprising an estimated 80% of the global demand for LGD in 2022, as compared to just over 50% of the overall diamond jewellery market. Over half the U.S. retailers offer LGD products in their stores or online, even as some emphasise that LGD have virtually no resale value and should not be considered as an investment. At least in the U.S. LGD are also becoming acceptable for engagement purchases, with the fiancé spending the same amount of money for a larger and higher quality stone. Estimates forecast the market value of LGD may be as high as US$ 40-50 billion by 2030, out of a much expanded total market, forecast to grow by Bain from US$ 75-80 billion today to US$ 125- 130 billion.

The market acceptance of lab-grown diamond (LGD) jewellery has created, as we have in the past forecast, a new opportunity for the Group. All our scanning, planning and polishing technologies are applicable to LGD. We are introducing this year the Pay-Per-Value paradigm for our Galaxy® inclusion mapping services, which will automatically adjust the pricing of the scans to LGD price points. Our Quazer® 3 laser system continues to be the most cost-effective offering for dicing the LGD wafer into the raw cubes, from which the gems are polished. Our Sarine Diamond Journey™ is also applicable to LGD, as it can document their responsible manufacturing and tell their story to the appropriate segment of the consumer market. Lastly, our AI-based e-Grading™ is especially applicable to LGD grading, as it allows grading of the polished LGD at an affordable charge commensurate with LGD pricing. Our planned cooperation and acquisition of a majority stake in the GCAL lab was also driven by the original stakeholders' perception that our technology will avail their expansion in the flourishing LGD market in the U.S.

Two financing entities, Mazalit and the Delgatto Diamond Finance Fund, have already adopted these reports as the basis for their financing of customers' rough diamonds

In 2022 Sarine introduced an innovative rough diamond appraisal and valuation report for the physical and online trade, as well as the financing and insurance, of rough diamonds. The appraisal report is based on the comprehensive analysis of the rough stone's external geometry and internal characteristics, uniquely augmented by the analysis of possible optimal polishing solutions. The virtually derived polished diamonds are then priced as per current pricelists to provide their realistic market value, thus generating an indicative valuation of the rough diamond. Two financing entities, Mazalit and the Delgatto Diamond Finance Fund, have already adopted these reports as the basis for their financing of customers' rough diamonds. We expect this business to expand in the upcoming years.

For further details on our business, objectives and goals for 2023, please refer to the Business Review section.

2022 Financial Highlights

Revenues for FY2022 decreased by 5% to US$ 58.8 million as compared to US$ 62.1 million for FY2021. The year-over-year decrease in revenues was due to the global political and macroeconomic headwinds discussed above. Our Gross profit margin was 69% in FY2022 as compared to 74% in FY2021. The decrease in our gross profit margin was primarily due to decreased overall sales and product mix. Profit from operations was US$ 11.0 million for FY2022, as compared to US$ 19.2 million for FY2021. The decline in profitability for FY2022 was due to overall lower sales in FY2022, as detailed above, concurrent with an overall increase in operating expenses, as the Group returned to generally normalised pre-Covid-19 spending levels. For FY2022 the Group’s operating margin was 19% as compared to 31% for FY2021. For FY2022 the Group reported a net profit of US$ 8.8 million as compared to US$ 16.5 million for FY2021. The decrease in net profit was mainly due to our lower profit from operations, as noted, and an approximate one-time US$ 0.6 million income tax charge associated with the repatriation of net funds from our wholly owned Indian subsidiary. Our full financials and notes may be reviewed in the Financials section.

Intellectual Property (IP) Infringement

The Company made significant headway in its IP enforcement activities in the Indian courts in 2022. An Indian court ruled against five manufacturers in Surat, finding then guilty of copyright infringement due to the illegal use of pirated Advisor® rough planning software. Due to the gravity of the issue and the clear-cut evidence presented to the court, a swift and final judgement against the infringers was handed down after only seven months, ordering the immediate removal of the illicit software from the infringing parties’ computers. The court decision's wording makes clear to the industry that the use of unlicensed or pirated versions of our Advisor® software is illegal and will not be tolerated. Other suits have progressed to the final arguments stage, and we expect rulings to be handed down during the first half of 2023.

Dividend

Sarine experienced continued profitability notwithstanding tough macroeconomic conditions in FY2022. The Group earned US$ 8.8 million, equivalent to basic and fully diluted profit per share of US cents 2.51. On February 26, 2023, the Board of Directors recommended that the Annual General Meeting (AGM) approve a final dividend of US 1.0 cents per ordinary share for the financial year ended December 31, 2022. This will bring our total payout for FY2022 to US 3.0 cents, some US$ 10.5 million.

Acknowledgements

On behalf of the Board of Directors, I would like to again thank our management and employees for their ongoing commitment to the Group. We would also like to thank our loyal customers and business partners and especially our conscientious suppliers, who have found ways to meet our schedules during these trying times of supply chain disruption. Lastly, I thank our loyal shareholders for their continued trust in Sarine and its management.

Respectfully Yours,


Daniel Benjamin Glinert
Executive Chairman of the Board